Economic Growth, Not Redistribution, Most Benefits the Poor, Working People, and the Middle Class

This column by ACRU General Counsel and Senior Fellow for the Carleson Center for Public Policy (CCPP) Peter Ferrara was published November 15, 2012 onForbes.com.

Stephen Moore and Julian L. Simon note in their underappreciated work, It’s Getting Better All the Time: 100 Greatest Trends of the Last 100 Years, that in the last century,1900 to 2000, real per capita GDP in America grew by nearly 7 times, meaning the American standard of living grew by that much as well. The authors explain,

“It is hard for us to imagine, for example, that in 1900 less than one in five homes had running water, flush toilets, a vacuum cleaner, or gas or electric heat. As of 1950 fewer than 20 percent of homes had air conditioning, a dishwasher, or a microwave oven. Today between 80 and 100 percent of American homes have all of these modern conveniences.”

Indeed, in 1900 only 2% of homes in America enjoyed electricity. As Cox and Alm note further in their insightful Myths of Rich and Poor, “Homes aren’t just larger. They’re also much more likely to be equipped with central air conditioning, decks and patios, swimming pools, hot tubs, ceiling fans, and built in kitchen appliances. Fewer than half of the homes built in 1970 had two or more bathrooms; by 1997, 9 out of 10 did.”

Such economic growth produced dramatic improvements in personal health as well. Throughout most of human history, a typical lifespan was 25 to 30 years, as Moore and Simon report. But “from the mid-18th century to today, life spans in the advanced countries jumped from less than 30 years to about 75 years.” Average life expectancy in the U.S. has grown by more than 50% since 1900. Infant mortality declined from 1 in 10 back then to 1 in 150 today. Children under 15 are at least 10 times less likely to die, as one in four did during the 19th century, with their death rate reduced by 95%. The maternal death rate from pregnancy and childbirth was also 100 times greater back then than today.

Moore and Simon report, “Just three infectious diseases – tuberculosis, pneumonia, and diarrhea – accounted for almost half of all deaths in 1900.” Today, we have virtually eliminated or drastically reduced these and other scourges of infectious disease that have killed or crippled billions throughout human history, such as typhoid fever, cholera, typhus, plague, smallpox, diphtheria, polio, influenza, bronchitis, whooping cough, malaria, and others. Besides the advances in the development and application of modern health sciences, this has resulted from the drastic reduction in filthy and unsanitary living conditions that economic growth has made possible as well. More recently, great progress is being made against heart disease and cancer.

Also greatly contributing to the well-being of working people, the middle class, and the poor in America has been the dramatically declining cost of food resulting from economic growth and soaring productivity in agriculture. As Moore and Simon report, “Americans devoted almost 50 percent of their incomes to putting food on the table in the early 1900s compared with 10 percent in the late 1900s.” While most of human history has involved a struggle against starvation, today in America the battle is against obesity, even more so among the poor. Moore and Simon quote Robert Rector of the Heritage Foundation, “The average consumption of protein, minerals, and vitamins is virtually the same for poor and middle income children, and in most cases is well above recommended norms for all children. Most poor children today are in fact overnourished.” That cited data comes from the U.S. Census Bureau. As a result, poor children in America today “grow up to be about 1 inch taller and 10 pounds heavier than the GIs who stormed the beaches of Normandy in World War II.”

That has resulted from a U.S. agricultural sector that required 75% of all American workers in 1800, 40% in 1900, and just 2.5% today, to “grow more than enough food for the entire nation and then enough to make the United States the world’s breadbasket.” Indeed, today, “The United States feeds three times as many people with one-third as many total farmers on one-third less farmland than in 1900,” in the process producing “almost 25 percent of the world’s food.”

Moreover, it is economic growth that has provided the resources enabling us to dramatically reduce pollution and improve the environment, without trashing our standard of living. Moore and Simon write that at the beginning of the last century,

“Industrial cities typically were enveloped in clouds of black soot and smoke. At this stage of the industrial revolution, factories belched poisons into the air–and this was proudly regarded as a sign of prosperity and progress. Streets were smelly and garbage-filled before the era of modern sewage systems and plumbing.”

Such sustained, rapid economic growth is the ultimate solution to poverty. It was economic growth in the last century that reduced U.S. poverty from roughly 50% in 1900, and 30% in 1950, to 12.1% in 1969. Among blacks, poverty was reduced in the 20th century from 3 in 4 to 1 in 4 through economic growth. Child poverty of 40% in the early 1950s was also reduced by half. It was economic growth that made the elimination of child labor possible as well.

The living standards of the poor in America today are equivalent to the living standards of the middle class 35 years ago, if not the middle class in Europe today. With sustained, vigorous economic growth, 35 years from now the lowest income Americans will live at least as well as the middle class of today.

If real compensation growth for the poor can be sustained at just 2% a year, after just 20 years their real incomes will increase by 50%, and after 40 years their incomes will more than double. If pro-growth economic policies could raise that real compensation growth to 3% a year, after just 20 years their real incomes would double, and after 40 years it would triple. That is the most effective anti-poverty program possible.

Just imagine what 2100 will look like if we can keep this economic growth going. Physicist Michio Kaku gave us an indication of that in a March, 2012 interview in the Wall Street Journal, explaining, “Every 18 months, computer power doubles, so in eight years, a microchip will cost only a penny. Instead of one chip inside a desk top, we’ll have millions of chips in all of our possessions: furniture, cars, appliances, clothes. Chips will be so ubiquitious that we won’t say the word ‘computer.'”

Kaku continued, “To comprehend the world we’re entering, consider another word that will disappear soon: ‘tumor.’ We will have DNA chips inside our toilet, which will sample some of our blood and urine and tell us if we have cancer maybe 10 years before a tumor forms.” He adds, “When you need to see a doctor, you’ll talk to a wall in your home, and an animated artificially intelligent doctor will appear. You’ll scan your body with a hand-held MRI machine, the ‘Robodoc’ will analyze the results, and you’ll receive a diagnosis that is 99% accurate.”

Kaku further projected, “In this ‘augmented reality,’…the Internet will be in your contact lens. You will blink, and you will go online. That will change everything.” Kaku concludes, “If you could meet your grandkids as elderly citizens in the year 2100, you would view them as being, basically, Greek gods.”

Just maintaining the real, long term, U.S.economic growth rate of 3.2% from 1947 to 2007 would have doubled our GDP of today 4 times, meaning a GDP 16 times as large as today. In that future, the poor of the time will have the standard of living of the American middle class in 2065. We will enjoy peace in our time, as the American military will be so advanced and dominant that no one else will even try to spend enough on their military to even threaten or challenge us. A world of free trade resulting from this Pax Americana will spread prosperity throughout the now third world. If we can gain some sense and reform and modernize our entitlement programs, and restrain unnecessary spending, America’s national debt will be a tiny fraction of our GDP.

I don’t believe in human suffering, so I agree that we must maintain a safety net to assure that no one suffers from destitution and need. But we must modernize our safety net entitlements to rely primarily on modern labor and capital markets in serving the poor and seniors, as I explain in detail in my 2011 book, America’s Ticking Bankruptcy Bomb. Such modernized safety net programs would actually serve the poor and seniors far more effectively, with better and higher incomes and benefits, than our current, old-fashioned, tax and redistribution, late 19th century entitlement programs. But because these modernized programs would rely primarily on capital and labor markets rather than taxpayers, they would cost taxpayers just a fraction of the costs of the current, old-fashioned, outdated programs. These reformed programs would also involve incentives for productive activities that would contribute directly to economic growth and prosperity today.

But these redistribution programs will never deliver the prosperity to the poor, working people and the middle class that robust economic growth would, as shown by the history of the 20th century, and the opportunities for further soaring prosperity of the 21st century, discussed above. This is all why there is nothing more important than maximizing economic growth.

And this is why to go beyond safety net programs to redistribute further just to make incomes and wealth more equal is counterproductive and not justifiable. The taxes to support that further redistribution would sharply slow economic growth by slashing the reward for productive activity, as would the equalization payments to the recipients. Indeed, to fully equalize wealth and income for everyone would leave no incentive for anyone to save and invest, providing the tools for increased productivity, or even to work at all. We have seen precisely that everywhere such extreme equalization policies have been tried, from North Korea to Cuba to the old Soviet Union and China, and even in the early settlements in America. That is why economic growth, not redistribution, most benefits the poor, working people, and the middle class.

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